Will Mexico's July Presidential Election Bring Energy Regression?

Mexico's National Regeneration Movement (MORENA) president, Andres Manuel Lopez Obrador (L), leaves the Hilton hotel after the official announcement as a candidate for national elections, in Mexico City, on February 18, 2018. The top three contenders to be Mexico's next president start the race in earnest Sunday when their parties and coalitions officially nominate them as their candidates for the July 1 election. / AFP PHOTO / PEDRO PARDO (Photo credit should read PEDRO PARDO/AFP/Getty Images)

“While AMLO has previously spoken of his intention to review and possibly revoke the Mexico energy reform package should he win the elections this July, his ability to do so remains in doubt. Repealing the reforms would ultimately require rewriting the Mexican constitution and for this he would require two thirds of the votes in both the Senate and the Chamber of Deputies, as well as the approval of the majority of state legislatures. Not even the most optimistic recent polls put he and his party near that position," James Fowler, Editor, Mexico Energy Report, ICIS (via personal communication)

The roll-out of Mexico's 2013 Energy Reforms has been as hot topic as any in the global energy space in recent years. Deregulation will continually bring in critical new outside investment to compete against and/or assist state-owned Pemex (oil and gas) and CFE (electricity). These slow moving behemoths had become too inefficient and technologically stagnant to meet the rising energy needs of an emerging economy with 130 million people.

Mexico's presidential election is coming in July and will challenge the efficacy of the reforms (FYI: Mexico presidents get a single six-year term, no re-election possible). Now ahead by double digits, front-runner Andres Manuel Lopez Obrador (AMLO) is a populist and has said that he wants to repeal the unpopular deregulation. With over 60% of Mexicans polling against the reforms, he questions the legality of the already awarded contracts and could stop new auction rounds.

Mexico just become the 30th member state of the International Energy Agency (IEA) and wants to reverse a declining oil and gas industry that has been forced to import more from the U.S. In fact, AMLO seeks better relations with OPEC, not IEA. In November 2016, Mexico was one of several non-OPEC producers to join with OPEC and remove 1.8 million b/d from the global market to help drain a global glut. The deal has helped oil prices rebound to three-year highs in January.

AMLO's anti-IEA position is rather unfortunate. IEA is the advising energy agency for the developed, OECD economies and wants Mexico to play a large role in shaping clean energy policies. Mexico's recent renewable energy auctions have brought the lowest prices in the world, with the third one in November seeing US$20.57/MWh.

The good news is that AMLO, who at 64 years old has already lost two previous presidential elections, seems to be mellowing with age and simmering his anti-privatization talk. Of course, he also surely realizes that the reforms have been a key bright spot for the Mexican economy, expected to grow another 3-4% this year. The country has awarded over 90 blocks to almost 70 operators, potentially pulling in some $155 billion in new investments. He should try to assuage their fears: many of these companies face final investment decisions on these projects this year or next.

One adviser says that AMLO has reviewed most of the "tenders awarded to private drillers and found them to be beneficial for Mexico." Mexico’s substantial oil and gas reserves remain attractive, with ~550 trillion cubic feet of recoverable shale gas alone. Given the incremental needs of the country (to me, Mexico has the most upside potential for new energy demand of all IEA nations), IEA reports the great promise: "$240 billion in the power sector and $640 billion in the upstream, and an additional $130 billion in energy efficiency."

Pipeline development is just as key as more E&P investment. The country has a dearth, and narcos bunkering oil is costing Mexico billions of dollars per year. New pipelines will fuel the new power projects that will significantly elevate the country's electricity availability and use, which is still just a third of what the other IEA nations have. Not to mention the manufacturing boom based in large part on energy intensive automotive manufacturing.

Although anti-pipeline protests have been growing, Mexico is viewed by midstream companies as having less pipeline pushback from "green groups." The future is huge: Mexico relies on gas for 60% of all electricity, and will need lots more storage to balance out demand peaks: "Mexico’s Natural Gas Dilemma."

But ultimately, as Mexico's natural gas (up 5-fold to 4.5 Bcf/d since 2010) and gasoline imports (up 2.2-fold to 410,000 b/d) from the U.S. continue to surge, AMLO probably hears the echoing calls for a renewed focused on increasing domestic production. After all, the purpose of the 2013 reforms was to increase self-sufficiency, not increase reliance on the U.S. This begins with the more outside investment, more technical expertise, and more supply options that foreign firms bring to the table.

I can sleep at night knowing that I've surely done my part talking with Mexicans: reverting back to resource nationalism won't make the country's oil and gas production grow, and it won't bring more electricity to homes and businesses.

My final point warrants its own posting, so I will just make a quick point on it. NAFTA is instrumental to rising energy flows between the U.S. and Mexico, and the ongoing renegotiation talks should actually be seen as an opportunity to lock-in more integration. Mexico’s deepwater oil and gas projects remain especially sensitive. These wells can cost $150 or $200 million and take eight years to make money.

I am Principal at JTC Energy Research Associates, LLC. I hold a B.A. in International Relations from Penn State University, with a minor in Statistical Analysis. I got my M.S. in Homeland Security from San Diego State University, with a focus on Energy Security, and an MBA ...